Chapter 2. True / False. 1. Financial statements are intended to tell the reader the value of a company. DIFFICULTY: REFERENCES: pp.

Transcription

1 True / False 1. Financial statements are intended to tell the reader the value of a company. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 2. Accountants are the main reason financial statements are prepared. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 3. The SEC created the objectives of financial reporting. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 1

2 4. The purpose of financial reporting is to provide economic information to external decision makers only. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 5. An objective of financial reporting is to reflect economic information concerning a company's cash flows. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 6. The concept of conservatism is the capacity of information to make a difference in a decision. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 2

3 7. There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 8. The lack of a common depreciation method makes it impossible to compare the performance of companies using different methods. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 9. The amount of a transaction may be immaterial by company standards but still be considered significant by financial statement users. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 3

4 10. The quality of accounting information that allows a user to compare two or more accounting periods for a single company is known as consistency. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 11. Materiality deals with the insignificance of an error in accounting information. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 12. The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is consistency. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 4

5 13. The quality of accounting information that allows a user to analyze two or more companies and look for similarities and differences is known as understandability. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 14. Most businesses have an operating cycle of greater than one year. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Current assets, other than cash, are expected to be sold or consumed beyond a company's normal operating cycle. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 5

6 16. Obligations related to operating activities that will be paid within the company's operating cycle must be reported as current liabilities on a classified balance sheet. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: The operating cycle for all businesses is one year. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: A construction company that builds skyscrapers is likely to have an operating cycle longer than one year. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 6

7 19. Three common categories of long-term assets are: (1) property, plant, and equipment, (2) investments, and (3) intangibles. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: In the Stockholders' Equity section of a classified balance sheet, a distinction is made between amounts invested by owners and amounts accumulated from business earnings. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 7

8 22. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among their current assets. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: An advantage of the current ratio is that it considers the makeup of the current assets. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: The excess of current assets over current liabilities is referred to as working capital. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 8

9 25. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000; and $222,500 of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1. a. True b. False True RATIONALE: ($75,000 + $115,000 + $150,000 + $222,500)/$225,000 = 2.5 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause the ratio to decrease. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: The purchase of inventory for cash will cause the current ratio to decrease. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 9

10 28. Income from operations does not include interest revenue and interest expense because these items are considered to be non-operating in nature. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Some analysts properly refer to a company s profit margin as its return on assets. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Dividends declared and paid reduce a company s retained earnings balance. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 10

11 31. Dividends paid appear on both the income statement and the statement of retained earnings. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: The statement of cash flows, like the income statement, reports only operating activities of a company. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash 33. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company's independent accountants (CPAs). a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 11

12 34. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company's financial position, operating results, and cash flows. a. True b. False True REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: An independent auditor's (CPA's) report is a guarantee that the financial statements are free from fraud or material error. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: In the independent auditors' report included with the annual report, management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements. a. True b. False False REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 12

13 Multiple Choice 37. What is the primary objective of financial reporting? a. To help investors make credit decisions. b. To help management assess cash flows. c. To protect users from fraudulent financial information. d. To provide useful information for decision making d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 38. In preparing financial statements, accountants should consider all of the following except a. the objectives of financial reporting. b. the characteristics that make accounting information useful. c. the most useful way to display the information found on the financial statements. d. the presentation of the value of a company. d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 39. Claims to economic resources are known as a. assets and liabilities. b. liabilities and stockholders equity. c. owners equity and stockholders equity. d. retained earnings and revenues. b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 13

14 40. Which of the following is not an objective of financial reporting? a. To reflect prospective cash receipts to investors and creditors. b. To reflect prospective cash flows to an enterprise. c. To reflect resources and claims to resources. d. To reflect current stock prices and information concerning stock markets. d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 41. Which of the following is the best description of the purpose of financial reporting? a. To allow users to access the daily detailed records of a business b. To help the users reach their decisions in an informed manner c. To provide users with an assessment of how long the company will continue as a going concern d. To allow users access to a list of all the individuals who owe the company money b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 42. Which of the following statements is true concerning external users of financial information? a. External users need detailed records of the business to make informed decisions. b. External users are primarily responsible for the preparation of financial statements. c. External users rely on the financial statements to help make informed decisions. d. External users rely on management to tell them whether the company is a good investment. c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 14

15 43. Relevant information can be quantitative or qualitative. In deciding whether to go to college part time or full time, which of the following is a qualitative factor for a student? a. The cost of tuition b. The opportunity to make friends c. The price of football tickets d. Good Student discounts on auto insurance rates b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 44. The preparation of financial statements requires that the information be understandable a. only to CPAs. b. to those willing to spend the time to understand it. c. only to those who take an accounting course. d. only to financial analysts and brokers. b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-01-Purpose 45. Jones, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan. The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time television last night, you are aware that Jones is a defendant in several lawsuits related to its defective tires that cause vehicles to overturn. The information presented on television is an example of financial information that is a. relevant. b. consistent. c. predictable. d. comparable. a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 15

16 46. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of a. comparability. b. consistency. c. neutrality. d. understandability. a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 47. Jackson Transportation purchases many pieces of office furniture with an individual cost below $200 each. Jackson chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant and independent CPA agree that no accounting principle has been violated. What accounting justification allows Jackson to expense the furniture? a. Conservatism b. Matching c. Materiality d. Verifiability c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 48. You are comparing three companies that use different depreciation methods. Which of the following would help you the most in making a comparison of the companies? a. The average earnings per share for the quarter b. Prospective cash receipts c. Claims to resources d. Disclosure of accounting policies d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 16

17 49. Tavella Co. applies the consistency convention. What does this mean? a. Tavella Co. uses the same names for all its expenses as its competitors. b. Tavella Co. has selected certain accounting principles that can never be changed. c. Tavella Co. applies the same accounting principles each accounting period. d. Tavella Co. applies the same accounting principles as its competitors. c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 50. Information that is material means that an error or alternative method of handling a transaction a. would possibly affect the judgment of someone relying on the financial statements. b. would not affect the decisions of users. c. might cause a company to understate its earnings for the accounting period. d. could increase the profitability of a company. a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP 51. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action? a. Comparability b. Conservatism c. Materiality d. Neutrality b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-02-GAAP Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 17

18 52. Which of the following is a current asset? a. Building b. Office Supplies c. Land d. Truck b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following is a noncurrent asset? a. Land b. Accounts receivable c. Cash d. None of these are correct a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following includes only current assets? a. Accounts receivable, cash, inventory, office supplies b. Cash, accounts payable, inventory, office supplies c. Cash, land, accounts receivable, inventory d. Accounts receivable, cash, furniture, office supplies a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 18

19 55. To determine the source of a company's noncurrent assets, on which financial statement will you look? a. Income statement only b. Balance sheet only c. Both the balance sheet and the income statement d. Both the income statement and the statement of retained earnings b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Bevco Company Bevco Company has provided the following information from its accounting records for the current year: Cash $ 55,000 Accounts receivable $ 45,000 Inventory 65,000 Land 75,000 Accounts payable 50,000 Notes payable (due 2021) 150,000 Retained earnings? Capital stock 20, Read the information for Bevco Company. What are Bevco current assets? a. $100,000 b. $165,000 c. $210,000 d. $240,000 b RATIONALE: ($55,000 Cash + $45,000 Accounts Receivable + $65,000 Inventory = $165,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 19

20 57. Read the information for Bevco Company. What are Bevco current liabilities? a. $50,000 b. $125,000 c. $200,000 d. $230,000 a RATIONALE: ($50,000 Accounts Payable) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: AICPA: FN-Measurement 58. Which one of the following items is reported as a current asset on a classified balance sheet? a. Trucks b. Accounts receivable c. Land d. Common stock b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 20

21 59. The following information is given for Camino Company: Cash $ 50,000 Inventory $ 45,000 Land 75,000 Accumulated depreciation 40,000 Plant and equipment 150,000 Accounts payable 60,000 What are the company s current assets? a. $220,000 b. $155,000 c. $130,000 d. $ 95,000 d RATIONALE: ($50,000 Cash + $45,000 Inventory = $95,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: AICPA: FN-Measurement 60. Which of the following accounts are normally reported as long-term liabilities on a classified balance sheet? a. Notes payable due in five years and bonds payable b. Interest payable and mortgage payable c. Income taxes payable and salaries payable d. Capital stock and accounts payable a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 21

22 61. Which one of the following is not a major category for long-term assets? a. Receivables b. Property, plant, and equipment c. Intangibles d. Investments a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following would not be considered to be an intangible asset? a. Franchises b. Copyrights c. Investments d. Goodwill c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following statements is true concerning intangible assets? a. Intangible assets have no economic substance. b. Intangible assets lack physical existence. c. Intangible assets are listed in the Stockholders Equity section of the balance sheet. d. Intangible assets appear in the Current Assets section of the balance sheet. b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 22

23 64. How are assets that are expected to be realized in cash, sold, or consumed within the normal operating cycle of a business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet? a. Property, plant, and equipment b. Current assets c. Intangible assets d. Current liabilities b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following terms characterizes the time period between the investment of cash in merchandise and the collection of cash from the sale of that merchandise? a. Operating cycle b. Natural business year c. Accounting period d. Fiscal period a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which set of items below includes current assets? a. Accounts receivable, net income, inventory, and dividends b. Cash, accounts receivable, capital stock, and sales c. Net income, cash, office supplies, and inventory d. Cash, accounts receivable, inventory, and office supplies d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 23

24 67. One significant difference between a classified and a non-classified balance sheet is the distinction between which of the following items? a. Assets and liabilities b. Current and noncurrent (or long-term) items c. Liabilities and owners equity d. Resources invested by the owners and amounts borrowed from creditors b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: For several years, Bosco Corporation has had a current ratio that was consistent with other companies in its industry. For the most recent year, Bosco s current ratio was significantly higher than that for the industry. What is the best possible explanation for this situation? a. The other companies in the industry were not as profitable. b. Bosco s liquidity has improved or is not leveraging financial resources effectively. c. Bosco has less property, plant, and equipment than other companies. d. Bosco has too much debt. b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Bloom's: Applying Guinther & Sons, Inc. Guinther & Sons, Inc., a retailer of men s clothing, earned a net profit of $77,000 for The balance sheet for Guinther & Sons includes the following items: Cash $29,000 Accounts receivable $39,000 Inventory 79,000 Prepaid insurance 3,000 Land 90,000 Accounts payable 21,000 Taxes payable 29,000 Capital stock 50,000 Retained earnings 97,000 Long-term notes payable 43, Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 24

25 69. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons. a. $100,000 b. $147,000 c. $150,000 d. $249,000 c RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid Insurance = $150,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 70. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons. a to 1 b to 1 c to 1 d to 1 c RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid Insurance)/($21,000 Accounts Payable + $29,000 Taxes Payable) = 3.00 to 1 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 25

26 71. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to 1. What does this comparison tell you about its liquidity? a. It is more liquid than its competitors. b. It has more long-term assets than its competitors. c. Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid. d. Guinther & Sons, Inc. is more profitable than its competitors. a RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid Insurance)/($21,000 Accounts Payable + $29,000 Taxes Payable) = 3.00 to 1 Current Ratio to 1 is more favorable than the industry s 2.4 to 1. REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements 72. Rosu Company has total current assets of $150,000 and total current liabilities of $50,000. What is the amount of working capital for Rosu Company? a. $200,000 b. $100,000 c. $125,000 d. $ 179,000 b RATIONALE: $150,000 $50,000 = $100,000 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 26

27 73. What is the correct method for calculating working capital? a. Total Assets Total Liabilities b. Current Assets Total Liabilities c. Current Assets Current Liabilities d. Current Assets + Current Liabilities c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 74. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its current ratio to decline below 2.0 to 1? a. $4,000 b. $8,000 c. $10,000 d. $12,000 a RATIONALE: ($8,000 Current Liabilities 2 = $16,000 = 2.0 to 1; $20,000 $16,000 = $4,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 27

28 75. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the company's short-run liquidity, which one of the following measures should be used? a. The current ratio b. An analysis of the company s long-term debt c. An analysis of the return on stockholders equity d. An analysis of retained earnings a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 76. Which financial statement reports information helpful in assessing working capital? a. Income statement b. Balance sheet c. Statement of retained earnings d. Statement of cash flows b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 28

29 77. Use Rizwi Corporation s list of accounts at December 31, 2017 to answer the following question: Rizwi Corporation List of Accounts at December 31, 2017 Cash $30,000 Accumulated Depreciation $ 12,000 Merchandise 21, ,000 Notes Payable Due 12/31/2025 Inventory Land 40,000 Accounts Payable 14,000 Buildings 80,000 Equipment 33,000 Accounts Receivable 25,000 Notes Payable Due 07/01/2019 2,000 What is Rizwi Corporation s current ratio? a to 1 b to 1 c to 1 d to 1 b RATIONALE: ($30,000 Cash + $21,000 Merchandise Inventory + $25,000 Accounts Receivable)/($14,000 Accounts Payable + $24,000 Notes Payable Due 07/01/2019) = 2.00 to 1 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 78. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital? a. $ 6,000 b. $ 14,000 c. $ 27,000 d. $ 45,000 c RATIONALE: ($18,000 Current Liabilities 2.5 = $45,000 Current Assets; $45,000 $18,000 = $27,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 29

30 79. For which of the following is the current ratio most useful? a. In evaluating a company s profitability b. In evaluating a company s solvency c. In evaluating a company s return on assets d. In evaluating a company s liquidity d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 80. Which of the following events will cause a company s current ratio to decrease? a. The sale of inventory for cash b. The sale of inventory for credit (accounts receivable) c. Issuing stock for cash d. Paying off long-term debt with cash d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 81. Which of the following events will cause a company s current ratio to rise? a. The collection of an account receivable b. Selling land for cash c. The discharge of an account payable by signing a short-term note payable d. None of these are correct b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 30

31 82. Liquidity relates to a company's ability to do which of the following? a. The ability to pay its financial obligations as they become due. b. The ability to stay in business over the long run. c. The ability to pay dividends to its stockholders. d. The ability to collect the amount its customers owe the company. a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Jobston, Inc. The balance sheet of Jobston Inc. includes the following items: Cash $22,400 Accounts receivable 11,700 Inventory 23,300 Prepaid insurance 1,040 Land 80,000 Accounts payable 47,500 Salaries payable 1,200 Capital stock 84,040 Retained earnings 5, Read the information about Jobston, Inc. What is Jobston s current ratio? a. 0.8 to 1 b. 1.6 to 1 c. 1.2 to 1 d. 2.5 to 1 c RATIONALE: Current Ratio = Current Assets/Current Liabilities = ($22,400 + $11,700 + $23,300 + $1,040)/($47,500 + $1,200) = $58,440/$48,700 = 1.2 to 1 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 31

32 84. Read the information about Jobston, Inc. What is Jobston s working capital? a. $58,440 b. $89,740 c. $84,040 d. $9,740 d RATIONALE: Working Capital = Current Assets Current Liabilities = ($22,400 + $11,700 + $23,300 + $1,040) ($47,500 + $1,200) = $58,440 $48,700 = $9,740 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following would appear on a multiple-step income statement but not on a single-step income statement? a. Net income b. Total expenses c. Total revenues d. Income before income taxes d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which of the following would not appear on an income statement? a. Sales revenue b. Cost of goods sold c. Accounts receivable d. Insurance expense c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 32

33 87. Which statement is true concerning an income statement? a. The income statement shows how much profit the company has earned since it began operations. b. Net income on the income statement should be equal to the amount of cash on the balance sheet. c. The income statement summarizes the results of operations for a point in time. d. None of these are correct. d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which statement is true concerning gains and losses? a. Gains and losses are reported on the balance sheet in the Assets and Liabilities sections, respectively. b. Gains and losses are special types of revenues and liabilities that are reported on the income statement. c. The amounts of gains and losses are included in the calculation of the current ratio, in the numerator and denominator, respectively. d. None of these are correct. d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Which one of the following subtotals or totals would appear in a multiple-step, but not a single-step, income statement? a. Income tax expense b. Income from operations c. Cost of goods sold d. Net income b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 33

34 90. What are the two subtotals that distinguish the multiple-step income statement from the single-step income statement? a. Income before taxes and income taxes b. Total operating revenues and total operating expenses c. Income from operations and income before taxes d. Total revenues and total expenses c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: A question asked by stockholders is, "How much profit did the company make?" What should the stockholder examine to get the most information that will help evaluate the answer to this question? a. The balance sheet, because retained earnings represents current profits b. The statement of cash flows, as cash inflows and outflows represents current profits c. The income statement, since it shows the revenues and expenses for the period d. The economic resources of the company c REFERENCES: pp and pp LEARNING OBJECTIVES: FACC.PONO LO: FACC.PONO LO: Under current accounting principles, how is net income on the income statement measured? a. Net change in owners equity during the period b. Excess of revenues over expenses during the period c. Net change in the cash balance during the period d. Excess of revenues over expenses less any dividends paid during the period b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 34

35 93. Which of the following statements is true regarding the multiple-step income statement? a. The multiple-step income statement is used only by companies that sell products, not those that provide services. b. The multiple-step income statement is helpful in determining a company's working capital. c. The multiple-step income statement reports the same net income as the single-step income statement. d. The multiple-step income statement is required under generally accepted accounting principles. c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: How is income from operations determined? a. By subtracting the total operating expenses from gross profit b. By subtracting the total operating expenses from sales c. By subtracting the cost of goods sold from sales d. By subtracting selling expenses from operating revenues a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 35

36 95. The following list contains several items that appear on an income statement. 1. Other revenue and expenses 5. Net income 2. Income before taxes 6. Operating revenues 3. Income taxes 7. Income from operations 4. Operating expenses Select the choice that lists the items in the order they would appear on a multiple-step income statement. a. 6, 1, 7, 4, 2, 3, 5 b. 7, 6, 1, 4, 2, 3, 5 c. 6, 4, 7, 1, 2, 3, 5 d. 6, 7, 4, 1, 2, 3, 5 c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cobb Company Selected data from the accounting records of Cobb Company are listed below. General and administrative $2,200 Operating revenues $6,000 expenses Selling expenses 1,800 Income taxes 600 Other revenues (expenses) 800 Dividends paid 1, Read the information about Cobb Company. What is Cobb s income from operations? a. $1,600 b. $2,000 c. $2,200 d. $2,800 b RATIONALE: ($6,000 Operating Revenues $1,800 Selling Expenses $2,200 General and Administrative Expenses = $2,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 36

37 97. Read the information about Cobb Company. What is Cobb s net income? a. $1,600 b. $2,000 c. $2,200 d. $2,800 c RATIONALE: ($6,000 Operating Revenues $1,800 Selling Expenses $2,200 General and Administrative Expenses = $2,000 + $800 Other Revenues (Expenses) $600 Income Taxes = $2,200) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: AICPA: FN-Measurement 98. Read the information about Cobb Company. By what amount will net income on a single-step income statement differ from net income on a multiple-step income statement if Cobb Company prepares both formats? a. $800 b. $600 c. $200 d. $0 d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Seikoson The 2017 income statement of Seikoson shows operating revenues of $130,800, selling expenses of $37,100, general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Seikoson s stockholders equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 37

38 99. Read the information about Seikoson. What is Seikoson s net income? a. $80,000 b. $92,190 c. $130,800 d. $46,470 d RATIONALE: Net Income = $130,800 $37,100 $34,900 $900 $11,430 = $46,470 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Read the information about Seikoson. What is Seikoson s profit margin (to the closest tenth of a percent)? a. 2.8% b. 35.5% c. 61.2% d. 14.5% b RATIONALE: Profit Margin: Net Income/Revenues = $46,470*/$130,800 = 35.5% *$130,800 $37,100 $34,900 $900 $11,430 = $46,470 REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 38

39 101. Forman, Inc. earned $600,000 profit during On which financial statement(s) will you find the dollar amount of the profit earned by the company? a. Balance sheet and income statement b. Income statement only c. Statement of retained earnings only d. Income statement and statement of retained earnings d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements 102. Lottony, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since last year. Which of the following is the least useful comparison in evaluating the drop in Lottony s profit margin? a. Comparison with the industry average for the current year b. Comparison with its current ratio for the current year c. Comparison with the profit margins for its major competitors for the current year d. Comparison with its profit margins for the past five years b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements Bloom's: Applying 103. Assume that you want to determine the profit margin for a company. Which one of the following financial statements is the best source of this information? a. Statement of retained earnings b. Statement of cash flows c. Statement of stockholders equity d. Income statement d REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 39

40 Hopper, Inc. Use the information from Hopper, Inc. to answer the following question Operating revenues $1,900,000 $1,600,000 Operating expenses 1,400,000 1,100,000 Income taxes 200, , Read the information about Hopper, Inc. Which statement best represents Hopper s performance? a. Hopper s profit margin ratio decreased. b. Hopper has become more profitable. c. Hopper s increase in operating revenues increased the company s net income. d. Hopper s operating expenses as a percentage of operating revenues remained the same. a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements 105. Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the company s profit margin? a. The profit margin was 15.8% in b. The profit margin was 15.8% in c. The profit margin was 31.5% in d. The profit margin was 31.5% in a RATIONALE: [$300,000 (or $1,900,000 Operating Revenues $1,400,000 Operating Expenses $200,000 Income Taxes)/$1,900,000 = 15.8%] REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 40

41 106. Read the information about Hopper, Inc. Which ratio are you able to calculate given only the information provided by Hopper? a. Profit margin b. Current ratio c. Working capital d. Gross profit percentage a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements AICPA: FN-Measurement Bloom's: Applying 107. Which one of the following equations represents retained earnings activity? a. Beginning Balance + Net Income + Dividends = Profits for the Year b. Beginning Balance + Cash Inflows Cash Outflows = Ending Balance c. Beginning Balance + Dividends Net Income = Ending Balance d. Beginning Balance + Net Income Dividends = Ending Balance d REFERENCES: PP LEARNING OBJECTIVES: FACC.PONO LO: Moore Industries Moore Industries began operations on January 2, 2017, with an investment of $50,000 by each of its two stockholders. Net income for its first year of business was $240,000. Moore Industries paid a total of $100,000 in dividends to its stockholders during the year Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 41

42 108. Read the information about Moore Industries. What is the company s retained earnings balance at December 31, 2017? a. $140,000 b. $190,000 c. $240,000 d. $340,000 a RATIONALE: ($0 Beginning Balance + $240,000 Net Income $100,000 Dividends = $140,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Read the information about Moore Industries. If the company s revenues were $500,000 for the year ended December 31, 2017, how much were total expenses? a. $160,000 b. $260,000 c. $640,000 d. $740,000 b RATIONALE: ($500,000 Revenues $240,000 Net Income = $260,000) REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 42

43 110. Read the information about Moore Industries. The company s dividends for the year a. reduce the amount of capital stock reported by the company. b. are part of Moore Industries' operating costs. c. are reported on the statement of retained earnings. d. are an expense of Moore Industries. c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Bloom's: Applying 111. If there are no changes in a company s capital stock during a period, the company may choose to prepare a. an income statement instead of a statement of stockholders equity. b. an income statement instead of a statement of retained earnings. c. a statement of stockholders equity instead of a statement of retained earnings. d. a statement of cash flows instead of a statement of retained earnings. c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: In preparing the financial statements for December 31, 2017, an accountant improperly classified the payment of prepaid rent as rent expense. Which of the following amounts would not be affected by this improper classification? a. Retained earnings, January 1, 2017 b. Retained earnings, December 31, 2017 c. Net income d. Total assets a REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 43

44 113. Carnival Bakery borrowed $500,000 from Front Street Bank. Carnival then hired a contractor to build a new Jonesie distribution outlet. In which section of Carnival s statement of cash flows would you find information that indicated that Carnival acquired the new Jonesie distribution outlet? a. Operating Activities b. Investing Activities c. Financing Activities d. Profit Activities b REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows Bloom's: Applying 114. A bank loaned $62 million to Apex Corporation to finance the construction of a new distribution warehouse. In which section of Apex s statement of cash flows would you be able to determine whether the company repaid any portion of the debt during the year? a. Operating Activities b. Investing Activities c. Financing Activities d. Profit Activities c REFERENCES: pp LEARNING OBJECTIVES: FACC.PONO LO: ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows Bloom's: Applying 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 44